joseph p. russoniello (csbn 44332) brian j. stretch …

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28THE UNITED STATES’ SENTENCING MEMORANDUMCASE NO. CR 06-0556 CRB

JOSEPH P. RUSSONIELLO (CSBN 44332)United States Attorney

BRIAN J. STRETCH (CSBN 163973)Chief, Criminal Division

TIMOTHY P. CRUDO (CSBN 143835)ADAM A. REEVES (DCBN 429112)Assistant United States Attorneys

450 Golden Gate Avenue, Box 36055San Francisco, California 94102Telephone: (415) 436-7200Facsimile: (415) [email protected]@usdoj.gov

Attorneys for PlaintiffUNITED STATES OF AMERICA

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

UNITED STATES OF AMERICA,

Plaintiff,

v.

GREGORY L. REYES,

Defendant.____________________________________

)))))))))))

CR 06-0556 CRB

THE UNITED STATES’SENTENCING MEMORANDUM

Sentencing Date: January 16, 2008Time: 9:00 a.m.Location: Courtroom 8Judge: Hon. Charles R. Breyer

Case 3:06-cr-00556-CRB Document 800 Filed 01/10/2008 of 31

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TABLE OF CONTENTS

Page No.

A. THE GUIDELINES CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Base Offense Level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2. Enhancements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

a. The Standard of Proof. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

b. Sophisticated Means. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

c. The Defendant’s Sentence Is Properly Enhanced for His Fiduciary Position asWell as His Role in the Offense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

d. Obstruction of Justice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. U.S.C. SECTION 3553 FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1. A Zero Loss Figure Understates the Actual Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2. Respect for the Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3. Deterrence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

C. THE DEFENDANT SHOULD BE FINED $41,250,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

D. THE DEFENDANT SHOULD PAY AT LEAST $89,998,733 IN RESTITUTION. . . . . . . 16

1. The Court Has the Power to Order Restitution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2. The Court Should Order a Payment of Restitution to Brocade .. . . . . . . . . . . . . . . . . . . . 17

3. The Amount of Restitution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

a. Brocade’s Costs of Investigation and Defense.. . . . . . . . . . . . . . . . . . . . . . . . . . . 19

b. The SEC Fine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

c. Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

d. Defense Costs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

i. The Defendant’s Costs.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

ii. The Co-Defendant’s Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

iii. Third Party Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23


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e. Prejudgment Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

E. THE DEFENDANT SHOULD BE REMANDED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

F. THE SENTENCING PROCEEDINGS SHOULD BE PUBLIC. . . . . . . . . . . . . . . . . . . . . . . 24

G. THE GOVERNMENT’S SENTENCING RECOMMENDATION. . . . . . . . . . . . . . . . . . . . 25


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TABLE OF AUTHORITIES

Page No.

FEDERAL CASES

Associated Milk Producers, Inc. v. Parr, 528 F. Supp. 7 (E.D. Ark. 1979). . . . . . . . . . . . . . . . . . 14

Bergonzi v. Rite Aid Corp., 2003 WL 22407303, (Del. Ch. Oct. 20, 2003). . . . . . . . . . . . . . . . . 14

Gall v. United States, __ U.S. __, 128 S.Ct. 586, (2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Kimborough v. United States, __ U.S. __, 128 S.Ct. 558, (2007).. . . . . . . . . . . . . . . . . . . . . . . . . 1

United States v. Ameline, 409 F.3d 1073, (9th Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Ancheta, 38 F.3d 1114, (9th Cir. 1994).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

United States v. Barnes, 125 F.3d 1287, (9th Cir. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

United States v. Bistrup, 449 F.3d 873, (8th Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Brock-Davis, 504 F.3d 991, (9th Cir. 2007). . . . . . . . . . . . . . . . . . . . . . 18, 20, 21

United States v. Christiansen, 958 F.2d 285, (9th Cir. 1992). . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7

United States v. Cummings, 189 F. Supp. 2d 67, 73. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 20-22

United States v. Cummings, 281 F.3d 1046 (9th Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . 20, 21

United States v. Day, 418 F.3d 746, (7th Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 18

United States v. Dunnigan, 507 U.S. 87, (1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

United States v. Foreman, 329 F.3d 1037, (9th Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

United States v. Gamma Tech Industries, 265 F.3d 917, (9th Cir. 2001). . . . . . . . . . . . . 18, 19, 21

United States v. Gordon, 393 F.3d 1044 (9 Cir 2004). . . . . . . . . . . . . . . . . . . . . . . . . . .th 16-18, 20

United States v. Howard, 894 F.2d 1085, (9th Cir. 1990). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

United States v. Humphrey, 279 F.3d 372, (6th Cir. 2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

United States v. Jackson, 346 F.3d 22, (2d Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Jordan, 256 F.3d 922, (9th Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Kelly, 993 F.2d 702, (9th Cir. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5

United States v. Koenig, 952 F.2d 267, (9th Cir. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21


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United States v. Little, 2007 WL 1231578 (9th Cir. April 27, 2007). . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Magana-Guerrero, 80 F.3d 398 (9th Cir. 1996).. . . . . . . . . . . . . . . . . . . . . . . . . . 8

United States v. Matsumaru, 244 F.3d 1092 (9th Cir. 2001).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Meksian, 170 F.3d 1260 (9th Cir. 1999). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

United States v. Mikolajczyk, 137 F.3d 237 (5th Cir. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

United States v. Mitchell, 2007 WL 2859680 (9th Cir. Oct.1, 2007). . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Munoz, 233 F.3d 1117 (9th Cir. 2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

United States v. Nace, 561 F.2d 763 (9th Cir. 1977).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

United States v. Najjor, 255 F.3d 979 (9th Cir. 2001).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

United States v. Piggie, 303 F.3d 923 (8th Cir. 2002).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

United States v. Rettenberger, 344 F.3d 702 (9th Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

United States v. Rice, 38 F.3d 1536 (9th Cir. 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 23

United States v. Staten, 466 F.3d 708 (9th Cir. 2006). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Unites States v. Thomas2007 U.S. App. LEXIS 29179 (7 Cir. 2007).. . . . . . . . . . . . . . . . . . . . .th 5

United States v. Youpee, 836 F.2d 1181 (9th Cir. 1988).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Waltuch v. Conticommodity Servs., Inc., 88 F.3d 87 (2d Cir. 1996). . . . . . . . . . . . . . . . . . . . . . 14

STATE CASES

Bansbach v. Zinn, 801 N.E.2d 395 (N.Y. 2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Biondi v. Beekman Hill House Apartment Corp., 731 N.E.2d 577 (N.Y. 2000). . . . . . . . . . . . . 14

Equitex, Inc. v. Ungar, 60 P.3d 746 (Colo. Ct. App. 2003).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Merritt-Chapman & Scott Corp. v. Wolfson, 264 A.2d 358 (Del. Super. 1970).. . . . . . . . . . . . . 14

Vonfeldt v. Stifel Fin. Corp., 1999 WL 413393 (Del. Ch. June 11, 1999). . . . . . . . . . . . . . . . . . 14

FEDERAL STATUTES

15 U.S.C. § 78ff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. § 3143(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

18 U.S.C. § 3553(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 11


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18 U.S.C. § 3553(a)(1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

18 U.S.C. § 3553(a)(2)(B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

18 U.S.C. § 3553(2(2)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

18 U.S.C. § 3572. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

18 U.S.C. § 3572(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

18 U.S.C. § 3663(a)(1)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

18 U.S.C. § 3663(a)(1)(B)(1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

18 U.S.C. § 3663(a)(2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

18 U.S.C. § 3663(b)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

18 U.S.C. § 3663A.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 17

18 U.S.C. § 3663A(a)(1)(C)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

18 U.S.C. § 3664(d)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 19, 21

18 U.S.C. § 3664(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

18 U.S.C. § 3664(f)(1)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 19

18 U.S.C. § 3664(f)(1)(B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

18 U.S.C. § 3664(j)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

18 U.S.C. § 371. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 5

18 U.S.C. § 3663(a)(1)(B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

8 U.S.C. § 3664. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

U.S.C. 3664(h). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

STATE STATUTES

8 Del. C. § 145(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

FEDERAL RULES

Federal Rule of Criminal Procedure 32. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FEDERAL REGULATIONS

28 C.F.R. § 50.9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24


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Pursuant to Federal Rule of Criminal Procedure 32 and Criminal Local Rule 32-5, the

United States respectfully submits this Sentencing Memorandum.

For the reasons set forth herein, the United States, applying the relevant sentencing

guidelines to this case and adhering to the Court’s prior ruling, calculates an offense level 19

resulting in a range of 30 to 37 months incarceration. Based upon the Sentencing Guidelines

calculation and consideration of the factors set forth in 18 U.S.C. § 3553, the government

recommends a sentence of 30 to 33 months incarceration, a fine of $41,250,000, and restitution

in the amount of at least $89,998,733.

A. THE GUIDELINES CALCULATION

The Supreme Court recently set out the procedures the Court must follow at sentencing.

The Court should begin by correctly calculating the applicable United States Sentencing

Guidelines range. Gall v. United States, __ U.S. __, 128 S.Ct. 586, 596 (2007) (Guidelines are

“the starting point and the initial benchmark”). While the Guidelines are advisory, the Court

must “remain cognizant of them throughout the sentencing process” and “must give serious

consideration to the extent of any departure from the Guidelines.” Id. at 594, 596 n. 6 (although

advisory, the Guidelines are “the product of careful study based on extensive empirical evidence

derived from the review of thousands of individual sentencing decisions”) (footnote omitted).

The Court should then consider all of the factors set out in 18 U.S.C. § 3553(a). Gall,

128 S.Ct. at 596; Kimborough v. United States, __ U.S. __, 128 S.Ct. 558, 570 (2007). The

Guidelines calculation ordinarily “will reflect a rough approximation of sentences that might

achieve § 3553(a)’s objectives.” Kimborough, 128 S.Ct. at 576 (internal punctuation and citation

omitted). After settling on the appropriate sentence, the Court must adequately explain the

chosen sentence, including any deviation from the Guidelines range. Gall, 128 S.Ct. at 597.

Appellate review of sentencing decisions are carried out under an abuse-of-discretion

standard and are limited to determining whether such decisions are “reasonable” Gall, 128 S.Ct.

at 594, 597.


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1. Base Offense Level

The Court’s November 27, 2007 Order Re Sentencing Guidelines reflects an offense level

of 6. Order Re Sentencing Guidelines at 3. As the PSR sets forth, however, the base offense

level should be 7. See PSR, ¶ 22.

Under U.S.S.G. § 2B1.1(a)(1), the base offense level is 7 if the defendant was convicted

of an offense referenced to that guideline and if the offense of conviction has a statutory

maximum term of imprisonment of 20 years or more. Both are satisfied here. Section 78ff of

Title 15 of the United States Code, under which the defendant was convicted, is referenced to the

applicable guideline. See Id. §§ 1B1.2(a), 2B1.1 cmt. 2(A), Appendix A. In addition, the offense

of conviction has a statutory maximum term of imprisonment of 20 years or more. See 15 U.S.C.

§ 78ff; PSR, ¶ 55.

2. Enhancements

a. The Standard of Proof

“[T]he party bearing the burden of proof will be required to meet a ‘preponderance of the

evidence’ standard” on sentencing guidelines issues. United States v. Howard, 894 F.2d 1085,

1090 (9 Cir. 1990) (affirming conviction and sentence for bank robbery where district courtth

declined to find that the defendant was a minor participant); see also United States v. Ameline,

409 F.3d 1073, 1086 (9 Cir. 2005) (“In resolving the factual dispute, the district court mustth

continue to apply the appropriate burdens of proof, consistent with Howard.”); but see United

States v. Staten, 466 F.3d 708, 717 (9 Cir. 2006)(“[T]he clear and convincing standard stillth

pertains post-Booker for an enhancement applied by the district court that has an extremely

disproportionate effect on the sentence imposed.”).

As the Court previously noted, when a sentencing factor has an “extremely

disproportionate” effect on the sentence relative to the offense of conviction, the facts underlying

that particular enhancement must be proven by clear and convincing evidence. Order Re

Sentencing Guidelines at 2. In this case only an enhancement for loss or the number of victims

would potentially implicate the “clear and convincing” standard. The other individual


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enhancements under consideration involve increases of two to four levels, which do not result in

an “extremely disproportionate” impact on sentencing. See generally United States v. Jordan,

256 F.3d 922, 927-29 (9 Cir. 2001). In any event, the government has met its evidentiaryth

burden under either standard.

“The district court’s application of the Sentencing Guidelines to the facts of a case is

reviewed for abuse of discretion.” United States v. Munoz, 233 F.3d 1117, 1125 (9 Cir. 2000).th

b. Sophisticated Means

The government previously set forth its position that the defendant used sophisticated

means to carry out his scheme and that the offense level should be enhanced as a result. See

Addendum to PSR, ¶ 7.

The “sophisticated means” enhancement under U.S.S.G. § 2B1.1(b)(9) is justified

because the defendant’s scheme was possible only with a highly specialized knowledge of how

the normal controls of corporate governance could be secretly manipulated. Having found the

weak spots in the corporation he was entrusted to manage, the defendant then actively and

systematically lied to the auditors, directors and shareholders of a public company to thwart their

proper supervision of the company for a period exceeding four years.

The wherewithal necessary to undertake such a fraud distinguishes this case from many

securities fraud cases involving misrepresentations and merits the enhancement under U.S.S.G. §

2B1.1(b)(9). Indeed, the Ninth Circuit has regularly approved a two-level “sophisticated means”

enhancement in circumstances similar to these where defendants have taken advantage of their

specialized knowledge to perpetrate frauds over long periods of time. See, e.g., United States v.

Mitchell, 2007 WL 2859680 at * 1 (9 Cir. Oct. 1, 2007) (“We agree with the district court thatth

Mitchell’s prolonged credit card fraud was sufficiently more complex than routine credit card

fraud to warrant the 2-level upward adjustment for using sophisticated means.”); United States v.

Little, 2007 WL 1231578 at * 2 (9 Cir. April 27, 2007) (“Little concealed his fraudulent billingth

by (1) cleverly misusing Medicare’s codes and billing system, and (2) submitting nearly all of his

false claims for only a handful of his most infirm patients, those who would be least likely to


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notice the fraud and report it to Medicare. While the scheme was not ‘singularly or uniquely

sophisticated,’ the district court could reasonably have concluded that it was significantly more

complex than a routine Medicare fraud case and depended on Little’s specialized knowledge of

the Medicare system.”); United States v. Rettenberger, 344 F.3d 702, 709 (9 Cir. 2003) (fakingth

disability to collect insurance, though consisting of simple lies, was sophisticated because

“careful execution and coordination over an extended period enabled the [defendants] to bilk

more insurers and reduce the risk of detection”); see also United States v. Bistrup, 449 F.3d 873,

882-83 (8 Cir. 2006) (“Even if any single step is not complicated, repetitive and coordinatedth

conduct can amount to a sophisticated scheme.”); United States v. Jackson, 346 F.3d 22, 25 (2d

Cir. 2003) (identity theft scheme sophisticated even though obtaining victim information was

relatively simple because “the total scheme was sophisticated in the way all the steps were linked

together so that [the defendant] could perceive and exploit different vulnerabilities in different

systems in a coordinated way).

c. The Defendant’s Sentence Is Properly Enhanced for His

Fiduciary Position as Well as His Role in the Offense

The Court has determined that the defendant’s sentence should be enhanced by four

levels because he was an officer (as well as a director) of a publicly traded company and by

another four levels because he was a leader of a criminal activity that was otherwise extensive.

Order Re Sentencing Guidelines at 11-12; U.S.S.G. §§ 2B1.1(b)(15)(A), 3B1.1(a). The

defendant objects that the application of both enhancements constitutes improper double-

counting. Addendum to PSR, ¶¶ 30, 32. The objection is without merit.

If different enhancements stem from different concerns, both can be simultaneously

applied. United States v. Kelly, 993 F.2d 702, 705 (9 Cir. 1993) (citation omitted) (applyingth

enhancements for more than minimal planning and for a leadership role in the offense); see also

United States v. Matsumaru, 244 F.3d 1092, 1108 (9 Cir. 2001) (impermissible double countingth

occurs “where one part of the Guidelines is applied to increase a defendant’s punishment on

account of a kind of harm that has already been fully accounted for by the application of another


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part of the Guidelines.”) (internal punctuation, citation omitted). The enhancement for abusing

trust as an officer or director recognizes that in a trust relationship “a person or organization

intentionally makes himself or itself vulnerable to someone in a particular position, ceding to the

other’s presumed better judgment some control over their affairs.” United States v. Humphrey,

279 F.3d 372, 380 (6 Cir. 2002). An abuse of that trust is a “separate wrong [that] meritsth

additional punishment.” Id.

The leadership enhancement, on the other hand, “addresses a somewhat different concern,

namely [the defendant]’s role within the group of coconspirators. As an organizer or leader, [the

defendant] is more harshly punished than if he had been a follower or a minor player in the same

scheme.” Kelly, 993 F.2d at 705. Courts have applied both enhancements together when they

are warranted. See, e.g., United States v. Thomas, 2007 U.S. App. LEXIS 29179 (7 Cir. Dec.th

17, 2007) (applying abuse of trust and leadership enhancements not double-counting:

“Application of both cannot be considered double counting as long as each is warranted.”); see

also United States v. Christiansen, 958 F.2d 285, 288 (9 Cir. 1992) (separate enhancements forth

abuse of trust and more than minimal planning not error: “Carrying out such an extended scheme

required more than minimal planning. Abuse of trust, on the other hand, grew out of her position

as branch representative and her ability to conceal her crime because of her position. The two

enhancements stemmed from separate concerns[.]”)

Both enhancements are warranted here. The defendant was the CEO and Chairman of

the Board of Directors of Brocade Communications Systems, Inc., a public company. As such he

owed a fiduciary duty to the company and its shareholders. The enhancement for his role in the

offense reflects his role as part of the criminal scheme separate from his position as a fiduciary.

The two enhancements are neither mutually exclusive nor redundant, and it is proper to apply

both.

/ / /

/ / /

/ / /


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d. Obstruction of Justice

Section 3C1.1 of the Sentencing Guidelines provides for a two-level increase for

obstruction of justice if

(A) the defendant willfully obstructed or impeded, or attempted to obstruct orimpede, the administration of justice with respect to the investigation,prosecution, or sentencing of the instant offense of conviction, and (B) theobstructive conduct related to (I) the defendant’s offense of conviction and anyrelevant conduct; or (ii) a closely related offense[.]

U.S.S.G. § 3C1.1. “Providing materially false information to a judge” is expressly listed as one

example of conducted covered by this section. Id. Note 4(f); see also id. Note 6 (“material”

means “evidence, fact, statement or information theat, if believed, would tend to influence or

affect the issue under determination”). By submitting a false and misleading declaration in order

to secure a severance in this case, the defendant obstructed justice, and his Guidelines calculation

should be increased two levels. See PSR, ¶¶ 15, 26; Addendum to PSR, ¶¶ 10-11.

On March 9, 2007, co-defendant Stephanie Jensen moved to sever the defendants’ cases

for trial. See Docket No. 126. Her moving papers claimed that Mr. Reyes “possessed direct and

unique knowledge of the options granting process” and that he “has the most direct knowledge of

how and to what degree Ms. Jensen participated in that process.” Defendant Jensen’s Motion for

Severance at 2. According to the motion, Mr. Reyes was a “critical witness” who could provide

“important exculpatory information” for Ms. Jensen. Id. at 2, 5.

In support of that motion, Mr. Reyes submitted a sworn declaration in camera, ex parte,

and under seal in support of his co-conspirator’s Motion for Severance. Crudo Decl., Exh. 4.

Paragraph 7 of that declaration states:

The Indictment alleges in paragraph 20 that Ms. Jensen conspired with me tochoose a historically low closing price for Brocade’s stock option grants, and thenbackdated committee meeting minutes of the board of Directors to conceal thedate on which the options were granted. If our trials were severed, I would testifythat Ms. Jensen and I did not conspire to choose historically low stock prices forBrocade’s stock option grants, nor did we conspire to backdate committeemeeting minutes in order to conceal the dates on which options were granted. Ms.Jensen did not have the authority to choose the date or stock price of options. Only I had that authority, and only I knew when I made my decisions. I told Ms.Jensen that the option grant dates were the dates that I made the grantingdecisions. Options were priced at the fair market value on the grant dates.


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Id., ¶ 7 (emphasis added). These points were, according to an in camera, ex parte, sealed

submission by Ms. Jensen, “critical” to her defense: “They are specific, clear, unequivocal,

uniquely known by Mr. Reyes, and highly exculpatory to Ms. Jensen.” Addendum to

Memorandum in Support of Motion for Severance, Docket No. 763-3, at 2.

At a sealed, in camera hearing on March 28, 2007, in response to the Court’s concerns

that the declaration was too generic to support a severance, Ms. Jensen’s counsel pointed directly

to those very lines in Paragraph 7 of the defendant’s declaration as the key to her motion:

What I would direct the Court’s attention to is the subsequent paragraphs. Paragraph 7, which talks about picking low prices, that’s a key point in theindictment . . . . And specifically on those points, I would like to really focus theCourt’s attention, if you look at Paragraph 7, lines 4 through 7, where – this is adiscussion of the claim of picking low prices. And the claim is that Ms. Jensenand Mr. Reyes conspired together to pick low prices, using hindsight. . . . [¶] Butthen it goes on, Your Honor, “Only I knew when I made my decisions. . . .” Andmost important of all, “I told Ms. Jensen that the option grants were the dates thatI made the granting decisions.” In other words, when there were occasions whenMs. Jensen would ask, “Gee, this is dated two weeks ago, what’s up with that,”and Mr. Reyes would say, “That’s the date that I made the decision.” That is asexculpatory as it gets, Your Honor. That is Mr. Reyes telling Ms. Jensen that thedate on the document is the date that he made the decision, and Ms. Jensen takesthat information to the bank. The jury cannot convict with that kind of evidence. That is absolutely exculpatory as to Ms. Jensen. And it’s specific, it’sunambiguous, it couldn’t be clearer.

Crudo Decl., Exh. 5 at 3-4 (Transcript of March 28, 2007 Proceedings).

Despite the government’s strong opposition, and despite the strong preference in the law

for joint trials, which “promote efficiency and serve the interests of justice by avoiding the

scandal and inequity of inconsistent verdicts,” particularly in cases charging a conspiracy, the

Court granted the Motion for Severance. Memorandum and Order Re: Severance, Docket No.

151, at 1 (internal punctuation, citations omitted). The defendants thus secured the tactical

advantages they sought, and the government was forced to conduct two separate trials, with all of

the additional costs and inefficiencies to the government and Court and inconveniences to the

witnesses.

But everything changed at trial. The evidence produced by the government was so

overwhelming that the defendants both openly conceded that options were not “priced at the fair


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market value on the grant dates,” as the defendant had told the Court. After the opening days of

trial when his counsel referred to “occasional” look-backs, in light of the crushing weight of the

evidence the defendant dropped any pretense that backdating was not in fact the standard

operating procedure at Brocade. Nor was there any evidence offered that the defendant told Ms.

Jensen that the option grant dates were the dates he made the granting decision. To the contrary,

the evidence was overwhelming that it was Ms. Jensen, working with the defendant, who looked

back and picked proposed meeting dates, based on historical low prices, and brought those to the

defendant for him to approve.

In fact, the defense in both cases was diametrically opposed to the statements the

defendant made in his sworn declaration to the Court. The defendant did not argue at trial that

“everybody knew” that “options were priced on the fair market value on the grant dates” as he

told the Court. The defendant did not contend that he told Ms. Jensen or anybody else that the

option grant dates were the dates that he made the granting decisions; instead he argued that it

was openly known to all that they were not. Thus it is clear: The defendant told the Court one

thing under oath, and then through his counsel he told the jury the exact opposite thing at trial.

The defendant obstructed justice. There can be no doubt that the he knowingly lied in his

declaration, which was “specific, unambiguous, and couldn’t be clearer.” See United States v.

Barnes, 125 F.3d 1287, 1293 (9 Cir. 1997) (court’s “interpretation of Appellant’s deceit fallsth

well within its broad discretion over sentencing enhancement”); United States v. Magana-

Guerrero, 80 F.3d 398, 400 (9 Cir. 1996) (court entitled to infer from record that defendant’sth

denials were conscious misrepresentations; not error to find obstruction); see also United States

v. Ancheta, 38 F.3d 1114, 1117 (9 Cir. 1994) (factual finding that defendant obstructed justice isth

reviewed for clear error). He provided materially false information to the Court to secure an

advantage that came at significant cost to the government, the Court, and the public. See United

States v. Nace, 561 F.2d 763 (9 Cir. 1977) (“There is a substantial public interest in joint trialsth

of persons charged together with committing the same offense.”). A two-level enhancement is

appropriate. See United States v. Dunnigan, 507 U.S. 87, 97 (1993) (“The perjuring defendnt’s


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The government also accepts the Court’s ruling on the application of U.S.S.G. §1

2B1.1(b)(2)(C) pertaining to 250 or more victims. Docket No. 737 at 11. For the record, thegovernment’s reiterates its objections to the Court’s decision not to apply either § 2B1.1(b)(1) or§ 2B1.1(b)(2)(C) for the reasons previously articulated.

THE UNITED STATES’ SENTENCING MEMORANDUMCASE NO. CR 06-0556 CRB

9

willingness to frustrate judicial proceedings to avoid criminal liability suggests that the need for

incapacitation and retribution is heightened as compared with the defendant charged with the

same crime who allows judicial proceedings to progress without resorting to perjury.”).

B. 18 U.S.C. SECTION 3553 FACTORS

The factors set forth in 18 U.S.C. § 3553(a) support the government’s recommended

sentence. This case involves the most senior and most highly compensated executive officer at

a public company engaging in a four-year scheme to hide what he was doing and then to lie about

it in an effort to gain a competitive advantage. The nature and circumstances of this case firmly

support the conclusion that a sentence of 30-33 months is reasonable.

1. A Zero Loss Figure Understates the Actual Loss

Pursuant to 18 U.S.C. § 3553(a)(1), the Court should consider “the nature and

circumstances of the offense” in rendering sentence. When the Court examines the

circumstances here, it will conclude that a zero loss figure understates the actual loss in this

securities fraud case.

The government respects the Court’s determination that it has not met its burden to prove

by clear and convincing evidence the loss figures advanced in its sentencing submissions. See

Order re Sentencing Guidelines at 8. A failure of proof to demonstrate a loss of millions of

dollars does not mean there was in fact no loss at all, however. The failure of proof means only

that no enhancement pursuant to U.S.S.G. § 2B1.1(b)(1) should be applied. While preserving its

objections, the government accepts the Court’s ruling.1

But the resulting zero loss figure certainly understates the loss in this case. And, not

withstanding the failure of proof with respect to section 2B1.1(b)(1), the Court may properly

consider the extent to which a zero loss figure understates the actual loss in determining the


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proper sentence. See U.S.S.G. § 2B1.1 Note 19(A)(iv) (“The offense created a risk of substantial

loss beyond the loss determined for purposes of subsection (b)(1).”).

For example, a loss figure of as little as $30,000 pursuant to section 2B1.1(b)(D) would

have potentially doubled the length of the defendant’s minimum sentence 18-24 months (level

15) to 37-46 months (level 21). Given the volume of trading alone, there can be little doubt that

enough shareholders sold their shares at a loss on January 6, 2005 to hit that $30,000 loss figure.

The government emphasizes this point not to seek an enhancement pursuant to section

2B1.1(b) but instead to underscore how dramatically the zero loss figure understates the actual

loss in the case. It is appropriate to keep that in mind as the Court weighs the sentencing factors

and considers an upward departure pursuant to U.S.S.G. § 2B1.1 Application Note 19(A)(iv).

2. Respect for the Law

Pursuant to 18 U.S.C. § 3553(2)(2)(A), the Court should also evaluate the defendant’s

sentence in terms of how it “promote[s] respect for the law.” The defendant’s public conduct in

this case makes this an especially important consideration.

Aspects of this case are tragic, but not just for the personal circumstances cited by the

defendant. They include the harm to the public inflicted by this media-savvy defendant and his

widely-reported proclamations that options backdating – along with its unspoken attendant

underpinnings of falsified corporate records; the misstatement of facts and financial results to

auditors, boards of directors, the SEC, and public shareholders; and the abuse of trust by well-

paid fiduciaries – was not really a crime because everyone in Silicon Valley did it. This false and

beguiling defense refrain continued for years until the jury’s verdict rightly stifled it. The

defendant’s self-serving and corrosive claim degraded the public’s appreciation for the

seriousness of intentionally falsifying corporate records and thus undermined public confidence

in our laws controlling publicly-owned companies.

The defendant’s own conduct in lying to the company’s investigators (having been told

that his responses could be shared with federal regulators) and to this Court demonstrate the

“above the law” attitude he had at Brocade and that he displayed throughout the trial. As June


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The section 3553(a) factors are discussed supra. 2


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Weaver testified, he really did think he was above the law. The defendant’s sentence should

taken this conduct into account.

3. Deterrence

At bottom, this case had far less to do with accounting than it did with the willingness of

a powerful CEO to flout the law. Other powerful people discharging their responsibilities as

officers in companies owned and financed by the public will be deterred from intentionally

falsifying corporate records by the sentence recommended by the government.

Given the amount of public attention the defendant himself has drawn to this case, and

given the cycle of corporate fraud that has occurred in the last few years, this sentencing factor

under 18 U.S.C. § 3553(a)(2)(B) takes on unusual importance. Respectfully, a sentence of at

least 30 to 33 months incarceration with the fine and restitution amounts recommended by the

government will have the proper and necessary deterrent effect, restore and promote respect for

the law, and reinforce the principle that the intentional falsification of corporate records by a

corporate officer in any public company is a very serious offense.

C. THE DEFENDANT SHOULD BE FINED $41,250,000

The maximum amount of the fine for which the defendant is subject is $41,250,000.

PSR, ¶ 65. There is no objection as to the calculation of the fine.

In determining the amount of the fine, the Court is guided by 18 U.S.C. § 3572. In

determining whether to impose a fine and the amount, time for payment, and method of payment

of a fine, the Court must consider, in addition to those factors set out at 18 U.S.C. § 3553(a), the2

following:

(1) the defendant’s income, earning capacity, and financial resources;

(2) the burden that the fine will impose upon the defendant, any person who is

financially dependent on the defendant, or any other person that would be

responsible for the welfare of any person financially dependent on the


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defendant, relative to the burden that alternative punishments would

impose;

(3) any pecuniary loss inflicted upon others as a result of the offense;

(4) whether restitution is ordered and the amount of such restitution;

(5) the need to deprive the defendant of illegally obtained gains from the

offense;

(6) the expected costs to the government of any imprisonment, supervised

release, or probation component of the sentence; and,

(7) whether the defendant can pass on to consumers or other persons the

expense of the fine.

With respect to factors (1) and (2), in light of the defendant’s resources, see PSR ¶ 51,

there is no concern that the maximum amount of the fine would impose an unreasonable or

undue burden upon the defendant or any other person. Nor is there a concern that the imposition

of the maximum fine could impair the defendant’s ability to pay restitution, even the entire

amount sought by the government. See 18 U.S.C. § 3572(b); see also infra. Indeed, given the

defendant’s enormous wealth, anything less than the maximum fine would not serve a fine’s

deterrent and punitive purposes.

With respect to factor (3), as discussed below the defendant’s scheme resulted in a loss to

Brocade of at least $89 million. In addition, the defendant’s false declaration to the Court

resulted in the government, Court, and witnesses incurring duplicative costs that would not have

been incurred had there been a single trial. Finally, while the Court determined that the

government did not provide sufficient evidence to prove an amount of loss under the Sentencing

Guidelines, the government respectfully submits that sufficient evidence was provided

demonstrating that at least some shareholders suffered some amount of loss, however

indeterminate. See infra.

With respect to factor (4), the government seeks restitution of at least $89,998,733.

/ / /


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With respect to factor (5), the government does not contend that the defendant illegally

obtained gains directly as a result of the offense.

With respect to factor (6), the expected costs to the government of any imprisonment,

supervised release, or probation component of the defendant’s sentence are set out at paragraph

67 of the PSR.

With respect to factor (7), whether the defendant can pass on to consumers or other

persons the expense of the fine, the Court has sought guidance from the parties on the question of

whether It has the authority to impose a fine directly on the defendant because the fine is not

subject to indemnification since the defendant had reasonable cause to believe that his conduct

was unlawful. Order Re Sentencing Guidelines at 13-14. Because no state law or agreement

between private parties can deprive the Court of its power under the statute, the Court retains the

authority to order a fine up to the maximum amount notwithstanding any of the defendant’s

indemnification rights. As for the question of whether the Court should impose a fine, the

presence of an indemnification agreement should not preclude the maximum fine.

Brocade’s bylaws provide that it “shall indemnify” certain persons in a criminal

proceeding against fines “if he acted in good faith and in a manner he reasonably believed to be

in or not opposed to the best interests of the Corporation, and . . . had no reasonable cause to

believe his conduct was unlawful.” Crudo Decl., Exh. 3 at 17-18; see also id. at 29 (articles of

incorporation permit indemnification to fullest extent permitted by law). An indemnification

agreement between the defendant and Brocade similarly provides that the company will

indemnify to the fullest extent permitted by law. See id. at 33-35. That agreement is governed

by Delaware law. Id. at 40; see also id. at 26 (Brocade is Delaware corporation).

Delaware law permits corporations to indemnify any person against fines relating to

criminal actions “if the person acted in good faith and . . . had no reasonable cause to believe the

person’s conduct was unlawful.” 8 Del. C. § 145(a). However, a corporation is prohibited from

indemnifying officers in a manner inconsistent with the substantive provisions of section 145(a).

In other words, Delaware public policy prohibits a company from indemnifying an officer who


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did not act in “good faith” or who had “reasonable cause to believe the person’s conduct was

unlawful.” See, e.g., Waltuch v. Conticommodity Servs., Inc., 88 F.3d 87, 95 (2d Cir. 1996)

(Delaware corporations may not waive § 145(a)’s requirements and extend indemnity beyond

extent permitted by § 145(a)); Vonfeldt v. Stifel Fin. Corp., 1999 WL 413393, at *2 (Del. Ch.

June 11, 1999) (“Delaware corporations lack the power to indemnify a party who did not act in

good faith or in the best interests of the corporation.”); see also Bergonzi v. Rite Aid Corp., 2003

WL 22407303, at *1 n.4 (Del. Ch. Oct. 20, 2003) (noting the Delaware Code “only allows”

indemnification if the person acts in good faith and has no reasonable cause to believe the

person’s conduct is unlawful).

Delaware courts have denied indemnification to defendants convicted of and fined for

conspiracy, perjury, and filing false SEC reports. See Merritt-Chapman & Scott Corp. v.

Wolfson, 264 A.2d 358 (Del. Super. 1970) (denying indemnification where federal jury convicted

defendants of conspiracy, perjury, and filing false SEC reports: “It would be anomalous, indeed,

and diametrically opposed to the spirit and purpose of the statute and sound public policy to

extend the benefits of indemnification to these defendants under the facts and circumstances of

this case.”). Other courts construing this or similar statutes have reached the same result. See,

e.g., Associated Milk Producers, Inc. v. Parr, 528 F. Supp. 7 (E.D. Ark. 1979) (finding a by-law

requiring indemnity for acts in “good faith” did not authorize indemnification for an employee

convicted of and fined for conspiracy to violate federal election laws because the employee

“deliberately violate[d] the federal criminal law” and “had no good reason” to doubt it was

unlawful, even though the employee believed his acts were in the best interest of the company);

Equitex, Inc. v. Ungar, 60 P.3d 746, 750-752 (Colo. Ct. App. 2003) (interpreting § 145 to

preclude indemnification where defendant’s intentional conduct demonstrated a lack of good

faith; affirming summary judgment to plaintiffs seeking a declaration indemnity was not

required); Bansbach v. Zinn, 801 N.E.2d 395 (N.Y. 2003) (no indemnity for former CEO

convicted of knowingly and willfully violating federal election law); Biondi v. Beekman Hill

House Apartment Corp., 731 N.E.2d 577 (N.Y. 2000) (“Because the underlying . . . judgment


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establishes that [defendant’s] acts were committed in bad faith, [defendant] is not entitled to

indemnification and cannot relitigate the good faith versus bad faith issue here . . . .”).

The defendant was convicted of conspiracy, securities fraud, filing false SEC reports,

falsifying books and records, and lying to auditors. Each count required a finding that he acted

“willfully.” See July 30, 2007 Jury Instructions at 21, 24, 28, 30, 32. Several counts also

required a finding that he acted “knowingly,” that is not by mistake, accident, or ignorance. Id. at

28, 30, 32. The securities fraud count required a further finding that the defendant “acted for the

purpose of defrauding buyers or sellers of Brocade stock—that is, Mr. Reyes acted with an intent

to cheat or deceive.” Id. at 24. In addition, the Court instructed the jury that “[g]ood faith on the

part of Mr. Reyes is inconsistent with a finding that Mr. Reyes knowingly or willfully committed

the alleged offenses. Thus, if the evidence in the case leaves you with a reasonable doubt about . .

. whether he possessed a good-faith belief that the alleged false or misleading statements were in

fact accurate, you must find Mr. Reyes not guilty on that count.” Id. at 37. The jury’s findings

that the defendant acted “willfully” (defined in part as “with the purpose of violating a known

legal duty”) and its rejection of his “good faith” defense would preclude indemnification.

The Court may make findings, based on the trial record, for purposes of sentencing that

the defendant had reasonable cause to believe that his conduct was unlawful, did not act in good

faith, and did not act in the company’s best interests. Indeed, the fact that he lied to the Audit

Committee of Brocade’s Board of Directors, through the committee’s investigators, Morrison &

Foerster, about the central conduct underlying both the company’s investigation and the case

before this Court would seem to dispose of any suggestion that the defendant acted in good faith

or in the company’s best interests. To the extent that the criminal judgment itself is not sufficient

to estop the defendant from arguing otherwise in any subsequent indemnification proceedings,

such a finding would have additional persuasive, if not preclusive, effect.

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Determining restitution is different than determining loss for purposes of calculating the3

length of imprisonment under U.S.S.G. § 2B1.1. See United States v. Gordon, 393 F.3d 1044,1052 n.6 (9 Cir. 2004) (“the MVRA’s purpose is to make the victims whole; conversely, theth

Sentencing Guidelines serve a punitive purpose, necessitating a different loss calculation schemethan the MVRA”).


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D. THE DEFENDANT SHOULD PAY AT LEAST $89,998,733 IN

RESTITUTION

1. The Court Has the Power to Order Restitution

The Court is empowered to order the defendant to pay restitution. The Victims and3

Witnesses Protection Act (“VWPA”) provides that, in sentencing a defendant convicted of an

offense under Title 18, the Court “may” order, in addition to any other penalty authorized by law,

that the defendant “make restitution to any victim of such offense.” 18 U.S.C. § 3663(a)(1)(A);

see also 18 U.S.C. § 3663(a)(2). In determining whether to order restitution under the VWPA,

the Court “shall consider” the amount of loss sustained by each victim, the defendant’s financial

resources, the needs of his dependants, and such other factors the Court deems appropriate. 18

U.S.C. § 3663(a)(1)(B)(I).

Although restitution under the VWPA is discretionary, recent amendments have made it

clear that the mandate of “‘full’ restitution” applies to the VWPA. United States v. Day, 418

F.3d 746, 756 (7 Cir. 2005). 18 U.S.C. § 3664, which sets forth the procedure for issuance andth

enforcement of an order of restitution, provides that “[i]n each order of restitution, the court shall

order restitution to each victim in the full amount of each victim’s losses as determined by the

court . . . .” 18 U.S.C. § 3664(f)(1)(A). At least one appellate court has addressed the tension

between section 3663's discretionary nature and section 3664's mandatory directive. See Day,

418 F.3d at 756-57. Given the strength of the factors weighing in favor of an order of restitution,

however, any conflict between the two provisions is academic.

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A separate restititionary statute, the Mandatory Victim Restitution Act (“MVRA”), 184

U.S.C. § 3663A, is limited to offenses that are not at issue here. See 18 U.S.C. § 3663A(a)(1),(c)(1) (crimes of violence, offenses against property, or offenses relating to tampering withconsumer products). While the MVRA makes restitution mandatory, it and the VWPA are, forthe most part, identical in all important respects, and courts interpreting these statutes look to andrely on cases decided under one provision in interpreting the other. See Gordon, 393 F.3d at1048 (citation omitted).


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The defendant was convicted of an offense under Title 18 (Count One, Conspiracy, 18

U.S.C. § 371) and thus falls within the VWPA. See United States v. Cummings, 189 F. Supp. 2d4

67, 73 (S.D.N.Y. 2002) (restitution may be ordered for conspiracy to commit securities fraud).

The Court “has broad discretion to determine the type and amount of evidence required to

support an award of restitution.” United States v. Najjor, 255 F.3d 979, 984 (9 Cir. 2001)th

(citation omitted); see also Gordon, 393 F.3d at 1053 (given MVRA’s remedial purposes, courts

given a degree of flexibility in accounting for a victim’s complete losses and “in making victims

of securities fraud whole”). A restitution order is reviewed for an abuse of discretion as long as it

is within the bounds of the statutory framework. Factual findings supporting an order of

restitution are reviewed for clear error, and the legality of an order of restitution is reviewed de

novo. Gordon, 393 F.3d at 1051.

2. The Court Should Order a Payment of Restitution to Brocade

Brocade was a victim of the defendant’s wrongdoing. As the Ninth Circuit has stated,

“We are presented with a statute, the primary and over-arching goal of which is to make victims

of crime whole, to fully compensate these victims for their losses and to restore these victims to

their original state of well-being . . . .” Gordon, 393 F.3d at 1053 (internal punctuation, citation

omitted) (discussing MVRA). The court should order restitution to make Brocade whole.

Under the VWPA, a “victim” is “a person directly and proximately harmed as a result of

the commission of” a Title 18 offense. 18 U.S.C. § 3663(a)(2). Victims may include

corporations. See, e.g., Gordon, 393 F.3d 1044; Cummings, 189 F. Supp. 2d at 75 (corporation

was victim of defendant’s financial manipulations to conceal underaccrual of corporation’s trade


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promotion expense and false statements to auditors and SEC). “Congress intended ‘victim’ to be

interpreted very broadly.” United States v. Youpee, 836 F.2d 1181, 1184 (9 Cir. 1988) (internalth

punctuation, citation omitted) (citing 18 U.S.C. § 3579, predecessor to VWPA).

The defendant’s conduct must have caused the victim’s loss, but the loss cannot be too far

removed from that conduct. “The main inquiry for causation in restitution cases [is] whether

there was an intervening cause, and, if so, whether this intervening cause was directly related to

the offense conduct.” United States v. Meksian, 170 F.3d 1260, 1263 (9 Cir. 1999); see alsoth

United States v. Brock-Davis, 504 F.3d 991, 1001 (9 Cir. 2007) (“Because a restitution order isth

authorized if the defendant created the circumstances under which the harm or loss occurred,

restitution was properly ordered.”) (internal punctuation, citation omitted); Gordon, 393 F.3d

1044 (“Though the extent of Cisco’s loss may have been affected by outside forces, Gordon’s

conduct – and his alone – directly resulted in the loss.”). The defendant’s conduct is not required

to be the sole cause of the loss, but any subsequent action contributing to the loss, such as an

intervening cause, must be directly related to the defendant’s conduct. United States v. Gamma

Tech Industries, 265 F.3d 917, 928 (9 Cir. 2001). “The causal chain may not extend so far, inth

terms of the facts or the time span, as to become unreasonable.” Id.

The factors the Court is to consider weigh in favor of restitution. The loss sustained by

Brocade was both significant and the direct, foreseeable result of the defendant’s fraudulent

scheme. In addition, the defendant’s financial resources amply provide for restitution. See 18

U.S.C. § 8663(a)(1)(B).

3. The Amount of Restitution

Section 3664 of Title 18 sets out the procedure for the issuance and enforcement of an

order of restitution. Day, 418 F.3d at 753. Any dispute as to the proper amount or type of

restitution shall be resolved under a preponderance of the evidence standard. The government

bears the burden to demonstrate the amount of the loss sustained by a victim as a result of the

offense. 18 U.S.C. § 3664(e). The court “shall order restitution to each victim in the full amount

of each victim’s losses as determined by the court and without consideration of the economic


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At least some of the costs discussed are tied to on-going litigation and therefore could5

continue to increase. In addition, with respect to expenses advanced pursuant to indemnityobligations, Brocade may not yet have been provided with all invoices for which it will beresponsible. See Crudo Decl., Exh. 1 at 1. 18 U.S.C. § 3664 provides that the Court may set adate for the final determination of the victim’s losses up to 90 days after sentencing. In addition,


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circumstances of the defendant.” 18 U.S.C. § 3664(f)(1)(A). In addition, “[i]n no case shall the

fact that a victim has received or is entitled to receive compensation with respect to a loss from

insurance or any other source be considered in determining the amount of restitution.” 18 U.S.C.

§ 3664(f)(1)(B).

Restitution is limited to compensation to a victim for actual losses caused by the

defendant’s criminal conduct. Gamma Tech Industries, 265 F.3d at 926. Where a victim’s loss is

neither speculative nor remote relative to the defendant’s criminal conduct, it is recoverable. See

United States v. Rice, 38 F.3d 1536, 1542 (9 Cir. 1994).th

a. Brocade’s Costs of Investigation and Defense

In 2005, Brocade completed two internal investigations of the company’s stock option

backdating practices. The company’s audit committee retained several law, accounting, and

support firms to conduct the investigation. Fees and costs for the investigation services totaled

approximately $3,694,433 for the first investigation and $4,881,774 for the second investigation.

Crudo Decl., Exh. 3 at 1-2.

In May 2005 Brocade announced that the staff of the SEC had begun an investigation into

its stock option practices. In responding to the SEC investigation and related lawsuits (SEC v.

Brocade Communications, Inc.; SEC v. Reyes, et al.), the company incurred approximately

$13,459,832 in legal fees and costs. Crudo Decl., Exh. 1 at 2.

The defendant’s scheme also spawned a number of private civil law suits. Brocade was

named as a nominal defendant in two separate but related derivative lawsuits, one in federal court

and the other in California state court. The company was also named as a defendant in a related

securities class action pending in federal court. As of early October 2007, the company had

incurred approximately $6,084,000 in legal fees and costs. Crudo Decl., Exh. 3 at 2.5


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if the victim subsequently discovers further losses, the victim has 60 days after discovery of thoselosses to petition the court for an amended restitution order. 18 U.S.C. § 3664(d)(5).


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The defendant should be ordered to pay restitution for all of these sums, a total of at least

$28,120,039. The VWPA expressly provides that restitution is to include, among other things,

“expenses related to participation in the investigation or prosecution of the offense.” 18 U.S.C. §

3663(b)(4). The Ninth Circuit “has adopted a broad view of the restitution authorization for

investigation costs. Generally, investigation costs – including attorneys’ fees – incurred by

private parties as a direct and foreseeable result of the defendant’s wrongful conduct may be

recoverable.” Gordon, 393 F.3d at 1056-57 (internal punctuation, citations omitted).

In Gordon, the Ninth Circuit found that the district court reasonably concluded that Cisco,

Inc.’s investigation costs, including attorney’s fees, were necessarily incurred in aid of “the

proceedings,” which included responding to five grand jury subpoenas and “a number of

government requests requiring Cisco to analyze vast amount of documentation and electronic

information.” 393 F.3d at 1057; see also id. (citing cases holding similarly). See also, e.g.,

Brock-Davis, 504 F.3d at 1000 (“[c]ourts have regularly awarded restitution for cleanup and

remediation costs); Cummings, 189 F. Supp. 2d at 77 (loss company incurred in restating

company’s financials was directly caused by defendant’s conduct).

Likewise, the defendant should be ordered to pay restitution for the costs Brocade

incurred as a result of the SEC and private lawsuits it was compelled to defend. In United States

v. Cummings, 281 F.3d 1046 (9 Cir. 2002), for example, the defendant wrongfully removed histh

children overseas, forcing his ex-spouse to incur over $14,000 in legal fees in a state civil

proceeding and a Hague Convention petition to recover custody. The Ninth Circuit found that

the VWPA’s provision relating to “expenses related to participation in the investigation and

prosecution of an offense” covered the ex-spouse/victim’s legal fees: “Here, Hopkins’ attorney’s

fees, which were incurred in an attempt to regain custody of her children, were a direct and

foreseeable result of Cumming’s improper removal and retention of them. There would have


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been no need to engage in civil proceedings to recover the children if Cummings had not

unlawfully taken them to Germany.” Id. at 1052; see also United States v. Mikolajczyk, 137 F.3d

237, 245-46 (5 Cir. 1998) (corporation’s costs of defending lawsuit recoverable as restitution).th

The defendant directly caused the company to expend millions of dollars conducting an

investigation into the underlying conduct (indeed, by lying to investigators he prolonged the

situation), restating Brocade’s financial statements, and defending against the lawsuits that

inevitably resulted. These were the natural and foreseeable results of his scheme. See Gamma

Tech Industries, 265 F.3d at 928 (“it is not unreasonable to assume that a natural result of paying

kickbacks is inflation of the charges in order to make the scheme profitable for the payer of the

kickbacks”); United States v. Koenig, 952 F.2d 267, 275 (9 Cir. 1991) (upholding restitution toth

bank for expenses incurred in connection with bank’s reprogramming of stolen ATM account

information, notifying customers of theft, answering customer inquiries); Cummings, 189 F.

Supp. 2d at 78 (“The conduct forming the basis of Cumming’s conviction for conspiracy,

including her active concealment of the underaccrual by manipulating Aurora’s financial records

and misleading the company’s auditors, was the direct cause of Aurora’s restatement expenses. . .

. It was reasonably foreseeable that a restatement would be necessary when the underaccrual was

eventually disclosed, and there were no intervening causes between Cumming’s conduct and

Aurora’s need to file a restatement. The losses claimed are not too attenuated, either factually or

temporally, from the conduct forming the basis fo the offense . . . . “). It is reasonable that he be

required to compensate Brocade for its loss.

b. The SEC Fine

To resolve the action brought by the SEC, Brocade paid a civil penalty of $7 million.

Crudo Decl., Exh. 3 at 2. Such a penalty was directly caused by the defendant and is subject to

restitution. See, e.g., Brock-Davis, 504 F.3d at 1000 (defendant “assumed the risk that DEQ

would impose extensive costs and requirements for cleanup”); United States v. Piggie, 303 F.3d

923, 928 (8 Cir. 2002) (investigative costs and fines paid by universities to NCAA wereth

properly included in restitution because they were caused by the specific conduct that was the


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basis of the conviction); Cummings, 189 F. Supp. 2d at 78-79 (suggesting that company’s

payment to settle securities fraud class action lawsuit would be subject to restitution had not

defendant already reimbursed company for same amount as part of settlement).

c. Tax Consequences

As a result of the defendant surreptitiously granting Brocade employees in-the-money

options, certain company employees were subject to “potential adverse personal tax

consequences.” To remedy this burden on its employees, in June 2006 the company amended

some employees’ options to increase the exercise price of the option and to give the employees

cash for the difference between the old (i.e., in-the-money) and new exercise prices. For other

employees the company canceled their options entirely in exchange for a cash payment to the

employee. The amount of these payments was $3.3 million. Crudo Decl., Exh. 6 (Form 10-Q for

period ending January 27, 2007). These payments likewise were caused by the defendant and

should be repaid to Brocade. The fact that the individual employees in the first instance rather

than Brocade would have been liable for the tax consequences makes no difference. See 18

U.S.C. § 3664(j)(1) (“If a victim has received compensation from insurance or any other source

with respect to a loss, the court shall order that restitution be paid to the person who provided or

is obligated to provide the compensation”).

d. Defense Costs

Pursuant to its by-laws as well as individual indemnification agreements to advance legal

expenses to its current and former officers and directors, including the defendant, in certain

circumstances, Brocade has advanced significant amount of legal fees as a result of the litigation

and governmental investigations that arose as a result of the defendant’s scheme. Crudo Decl.,

Exh. 1 at 2. These amounts, detailed below, should be repaid to the company as restitution.

They were certainly foreseeable. Indeed, the defendant himself took advantage of the lion’s

share. As the Ninth Circuit stated in upholding an award of restitution in a case where the

defendant falsified safety and quality records for airplane parts,

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Like the bank which had an obligation to reprogram its computers to protect itscustomers, Grumman had an obligation to protect its customers (and the public)by not using fasteners which did not comply with industry standards. The districtcourt found that, in order to fulfill its obligation, Grumman had to impound orrefuse to use its [defendant]-supplied inventory.

Rice, 38 F.3d at 1542. Brocade was likewise obligated to advance these defense costs and thus is

entitled to recover them.

i. The Defendant’s Costs

Brocade has advanced at least $46,709,323 to pay the defendant’s cost of defense. Crudo

Decl., Exh. 1 at 3. All of that should be reimbursed to the company.

ii. The Co-Defendant’s Costs

Brocade has advanced at least $7,140,253 for the defense of the defendant’s convicted co-

conspirator, Stephanie Jensen. Crudo Decl., Exh. 1 at 3. This entire amount likewise should be

restored to the company. The Court has the discretion to apportion some or all of this amount

(or, indeed, any amount of restitution) between the defendants or to make them jointly and

severally liable for the entire sum, but it is not required to do so. United States v. Foreman, 329

F.3d 1037, 1039 (9 Cir. 2003); 18 § U.S.C. 3664(h). th

While the government has no objection to apportioning this amount entirely to the

defendant or to make the defendant and Ms. Jensen jointly and severally liable for the amount,

given Ms. Jensen’s role in the offense and her senior position within the company the United

States respectfully submits that restitution stemming from Ms. Jensen’s defense costs should be

apportioned entirely to her.

iii. Third Party Costs

To date Brocade has advanced at least $10,628,463 for costs to at least 20 other persons.

Crudo Decl., Exh. 1 at 3. The government has no objection to apportioning this amount entirely

to the defendant. However, the United States respectfully submits that it would be appropriate

for those individuals named as defendants in the SEC civil action (Messrs. Byrd and Canova) to

be liable to the company for their own costs. The defendant should pay restitution for the costs

of the remaining parties, at least $4,869,371.


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e. Prejudgment Interest

The defendant is liable for prejudgment interest from the dates the above sums were paid

by Brocade. Gordon, 393 F.3d at 1057-59.

E. THE DEFENDANT SHOULD BE REMANDED

18 U.S.C. § 3143(b) provides that a defendant who has been convicted and sentenced and

who has filed an appeal “shall” be detained unless the Court finds that any appeal raises a

substantial question of law or fact likely to result in (for present purposes) reversal, an order for a

new trial, or a sentence that does not include a term of imprisonment. The government requests

that the Court set a date by which the defendant is to be remanded to the custody of the Bureau of

Prisons sufficient to allow the Bureau of Prisons time to designate to an appropriate facility, but

in no event more than 90 days from the date of sentencing.

F. THE SENTENCING PROCEEDINGS SHOULD BE PUBLIC

The defendant has asked the Court to consider closing the courtroom for certain aspects

of the sentencing proceedings. The United States objects to this request.

Procedures and standards regarding the closure of judicial proceedings to members of the

press and public are set forth in 28 C.F.R. § 50.9. As stated in that regulation, “[b]ecause of the

vital public interest in open judicial proceedings, the Government has a general overriding

affirmative duty to oppose their closure,” and there is a “strong presumption” against closing all

or part of any proceedings.

To the extent that the defendant is concerned with disclosing sensitive medical records in

public, the government believes that it will not be necessary to refer to the details set forth in the

materials previously filed under seal by the defendant. The government does not expect to

dispute or even address those details. The only question for the Court will be the legal effect of

that information. The government anticipates that the parties and the Court will be able to

address the necessary issues while respecting any legitimate privacy concerns.

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G. THE GOVERNMENT’S SENTENCING RECOMMENDATION

For all of the reasons set out above, the United States recommends the application of the

following sentencing guidelines:

(I) § 2B1.1(a)(1) for the fraud base offense level of seven (7);

(ii) § 2B1.1(b)(9)(c) for sophisticated enhancement with a two (2) levelenhancement;

(iii) § 2B1.1(b)(15)(A)(I) for an officer and director of a publicly traded companywith a four (4) level enhancement;

(iv) § 3B1.1(a) for an organizer or leader of a criminal activity that involved fiveor more participants with a four (4) level adjustment; and

(v) § 3C1.1 for obstruction of justice with a two (2) level enhancement.

The total resulting offense level is level 19 with a range of 30 to 37 months incarceration. The

government recommends a sentence of incarceration of between 30 and 33 months as reasonable.

The government further recommends a fine of $41,250,000 and restitution to Brocade in the

amount of at least $89,998,733.

DATED: January 10, 2008 Respectfully submitted,

JOSEPH P. RUSSONIELLOUnited States Attorney

/S/__________________________TIMOTHY P. CRUDOADAM A. REEVESAssistant United States Attorneys


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